September 28, 2020 BARRON’S 7
Of course, Al Gore and Hillary Clinton won
the popular vote in 2000 and 2008, respec-
tively, but lost in the Electoral College.
This model shows the current race
tighter than the polls, which have Biden
leading Trump by 6.5 points, down by
about a point in the past month, according
to the RealClearPolitics Poll Average. But
“Trump’s trend has been falling in Septem-
ber, with equities selling off and the dollar
rising,” according to a Strategas client note.
That’s just a snapshot of the current
conditions, they emphasize. The race’s
tightening coincides with fewer new
Covid-19 cases, shifting voters’ attention to
the economy, the Supreme Court, and law
and order, they add. But a renewed flare-
up in Covid could move the emphasis back
to Trump’s handling of the pandemic.
If 2020 has shown anything, a lot can
change in a month.
P
olitics might be more of a
sideshow to the real busi-
ness of the economy, which
is driven primarily by credit.
Housing is booming, with
sales of existing homes run-
ning at an annual rate of 6
million units in August, while new home
sales topped the 1 million yearly rate, the
highest level since 2006, with sales of both
constrained by lack of supply. It’s not just
the flight from cities to the suburbs that’s
causing the trend, but cheap mortgages,
with 30-year conventional fixed-rate loans
averaging 2.90%, according to Freddie Mac,
just a hair above the record low of 2.86%
touched earlier in the month.
Speculative-grade corporations also
have been feeding at the credit trough.
Even before the third quarter ended, junk-
bond issuance set a new yearly record,
topping 2012’s mark of $329.6 billion this
past week, Bloomberg reported. But there
are signs that the boom may be quieting
down, at least for now.
High-yield bond funds saw outflows of
nearly $5 billion in the week ended Thurs-
day, the biggest exodus since last March,
when the capital markets were in near-melt-
down before the Fed came to the rescue.
High-yield spreads—the risk premium for
speculative-grade credits—widened by 40
basis points, to 547 basis points, Bank of
America credit strategists Hans Mikkelsen
and Yunyi Zhang write in a client note. (A
basis point is 1/100th of a percentage point.)
One speculative-grade borrower that
made it to market this past week was Car-
vana (ticker: CVNA), which issued $1.1 bil-
lion in notes a day after its stock popped,
following strong guidance for the third
quarter, in which it said it expected to break
even on Ebitda (earnings before interest,
taxes, depreciation, and amortization). Car-
vana had to pay 5.625% on a five-year issue
and 5.875% on an eight-year maturity.
Carvana also has been a beneficiary of
other parts of the credit market, securitizing
loans on the used cars it sells in its “vending
machines” to those smiling millennials in
their jammies seen on its television com-
mercials. According to an asset-backed
securities offering rated by Kroll Bond Rat-
ing Agency earlier this year, the $480 mil-
lion issue wascollateralized by$495million
of auto loans to borrowers with an average
FICO score of 554—scores that low are con-
sidered subprime—who paid an average
rate of 19.20% on loans with an average
original term of 71 months.
Kroll rated the various classes of ABS
from AAA to BB, owing to various credit
enhancements. If all goes as planned, the
top AAA tranche gets paid off, while the
bottom BB absorbs any losses. Meanwhile,
CEO Ernest Garcia III and his father, Er-
nie Garcia II, Carvana’s largest share-
holder, were worth $21.4 billion after the
stock’s pop Tuesday, Bloomberg reported.
But away from the capital markets,
there are signs of tightening credit, accord-
ing to a report from Macro Intelligence
Partners. Banks have been imposing more
stringent standards for borrowers, espe-
cially for consumers, a change borne out
by the Fed’s Senior Loan Officer survey.
With banks’ net-interest margins shrink-
ing as a result of Fed rate cuts, the percent-
age of them tightening credit-card standards
is higher than it was during the dot-com
bubble or the Great Financial Crisis. Some
also are reducing credit limits. MI2 notes
that Capital One Financial (COF), the
third-largest card issuer, trimmed limits by
as much as two-thirds after the expiration of
the $600 weekly supplemental unemploy-
ment payments from the Cares Act.
Especially vulnerable is subprime auto
lending, MI2 added. In the second quarter,
loans delinquent for 60 days jumped to
7.24% of subprime loans outstanding, from
4.4%, “within spitting distance of GFC
[Global Financial Crisis] extremes.” At the
same time, the report noted a downturn in
the Conference Board’s consumer confi-
dence question about auto-buying plans.
“The bad news is until we get through the
election, we are dealing with a partisan and
highly dysfunctional government, which is
why credit matters!” MI2 concludes.B
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